Tax Implications for Transactions and Employee Benefits

The article discusses the tax implications for various transactions such as shop sale, restrictive covenant, and sale of apartment, along with the tax liabilities for employee benefits such as salary, commission, car, electronic devices, and subscription fee. The relevant laws and their applications have been discussed in detail.

TAXATION
Student Name
[Pick the date]

Question 1
Issue
The given task aims to highlight the tax implications with regards to the transactions that Amber
has entered into. The impact of these transactions could lead to production of assessable income
or have implications in the form of capital gains tax (CGT) when the underlying proceeds are
capital. The crucial issues concerned are listed as below.
1) Shop sale – Whether the proceeds are revenue or capital? Also, the CGT implications need to
be highlighted with focus on the various constituent items.
2) Restrictive Covenant - Whether the proceeds are revenue or capital? Also, the tax implications
based on this identification of proceeds needs discussion.
3) Sale of apartment - Whether the proceeds are revenue or capital? If capita then whether the
proceeds would attract CGT or not and the relevant mechanism of computation.
Law
The relevant law which is applicable to the transactions enacted by Amber are as follows.
Shop Sale
The first aspect is to highlight the capital asset which has been carried out in s. 108-5 ITAA 1997
whereby land, shares, property, goodwill are recognised as capital assets. It is critical to note that
capital assets need not be tangible and even intangible assets such as goodwill are included
within the fold of capital asset. This definition of capital assets is critical owing to proceeds from
the sale of these assets being labelled as capital proceeds (Krever, 2016). Contributions to the
assessable income only include revenue receipts as capital receipts merely highlight the return of
capital previously invested. However, any capital gains or losses that are derived in the process
would attract CGT. In this regards, the first step is to highlight the capital event and label it in
accordance with s. 104-5. This is critical since the precise methodology of CGT computation
depends on the underlying event. With regards to disposal of a capital asset, the relevant event
would be A1 which indicates that capital gains can be computed by finding the difference
between proceeds of sales and asset cost base (Barkoczy, 2017).

However, an exception to this discussion is stock which in accordance with s. 118-25 ITAA
1997 would not have any CGT implications irrespective of the quantum of capital gains or losses
realised on the sale. Further, the asset cost base is computed as per s. 110-25 which lists down
five crucial elements that are included in cost base (Sadiq et. al, 2016). Once the gross capital
gains are obtained, then the same can be reduced further through the application of discount
method as highlighted under s. 115-25 ITAA 1997. This method allows for 50% lowering of
capital gains provided the underlying asset was held for a period exceeding one year. Another
alternative method named indexation method increases the cost base by making relevant inflation
related adjustments to lower the taxable capital gains (Woellner, 2014).
Restrictive Covenant
The key issue pertaining to restrictive covenant related contracts is whether the proceeds would
assume revenue nature or capital. This question becomes pivotal for highlighting the appropriate
taxation treatment of these proceeds. A relevant taxation ruling to help in this regards is TR
95/35. In accordance with this ruling, the restrictive covenant tends to levy restrictions on the
given individual with regards to opening a new business in a given geography within a given
time frame. The restrictions imposed in the form of restrictive covenant restrict the right of the
taxpayer (CCH, 2013). This right of the taxpayer if unconstrained can potentially produce future
cash flows for the taxpayer over several years and therefore, the right available to the taxpayer to
open business without any restrictions related to geography and time is an assets. As a result,
proceeds from restrictive covenant would be capital proceeds. Support for this is highlighted by
the verdict in the Reuter v. FC of T 93 ATC 4037; (1993) 24 ATR 527 case where the proceeds
arising from restrictions on right of sue were termed as capital proceeds (Deutsch, Freizer,
Fullerton, Hanley & Snape, 2016).
Apartment
As per s. 108-5, one of the capital assets is property which includes apartment which is
essentially a fixed asset. This implies that the proceeds derived from sale of the apartment would
lead to capital proceeds which are free from taxation burden as it does not indicate any economic
benefit. However, CGT implications may result based on the comparison of the cost base and the
sales proceeds generated. It is essential to note that in accordance with s. 104-5 ITAA 1997, the

death of the owner does not result in a capital event and thereby there is no need to derive the
underlying capital gains or losses (Barkoczy, 2017). As a result, the CGT implications would be
considered only when the asset is disposed by the legal heir. Also, is relation to potential
mismatch of timing between sale contract enactment and sale proceeds receipt, TR 94/29
advocates that CGT liability ought to be levied in the year when the contract is executed. An
addition aspect which is pivotal in regards to residential properties is that these may be used by
the owner as residence (CCH,2013). In such cases, the house or apartment would be treated as
main residence and subdivision 118-B ITAA 1997 provides complete CGT exemption on the
sale of the house. A necessary condition is that the property should not be used for rent or any
other assessable income generation and must serve as main residence of the taxpayer for the
complete holding period (Deutsch, Freizer, Fullerton, Hanley & Snape, 2016).
Application
Shop Sale
In line with the information provided, it is evident that the underlying chocolate shop contains a
host of assets but these are capital assets and hence the payment from these would be capital
proceeds which would be free from taxation burden. However, the CGT implications could
potentially arise which need to be highlighted.
One of the capital assets from the shop is goodwill which has been disposed triggering an A1
event. The resultant capital gains therefore would be required to be computed by considering the
cost price and selling price of the same which has been provided in the given case. Also, the
taxable capital gains subject to CGT would be half of the capital gains obtained through
procedure referred under A1 event.
Another capital asset is the equipment whose disposal also triggers an A1 event but the
computation of capital gains on this asset would be different from goodwill. This is because
equipment is a depreciable asset on which depreciation expense is deducted for tax purpose by
the business. Thus, for CGT computation, a comparison between the sale value and the
underlying book value ought to be considered. Deduction under s. 115-25 may be availed owing
to long term asset ownership. However, the stock related capital gains or losses would be
ignored.

Restrictive Covenant
The restrictive covenant that has been imposed on Amber tends to apply certain restrictions on
the otherwise legal right available to her to open any business in any geography at any point of
time. However, Amber is restricting the usage of this legal right by committing to the restrictive
covenant. Hence, there would be potential loss of future profits from business and hence the
given proceeds on signing the contract containing the covenant would be capital in nature. Being
capital, there would not be any tax on the proceeds, However, any capital gains reaped in the
process would be subject to CGT.
Apartment-
Even though the given apartment has not been bought by Amber herself but still she has
ownership over the same since it is a deceased estate. Her uncle made a purchase of the same in
1992 and for the next 2 decades leading to his death, he continued to stay in this apartment
implying that it was his main residence. After his death in October 2013, The property is now
serving as main residence for Amber. This implies that no CGT implications would arise on the
sale of the apartment owing to exemption under subdivision 118-B. Also, considering the
apartment is a capital asset, hence the proceeds from sale would be capital and non-taxable.
Therefore, the sale of apartment does not result in any taxation liabilities for Amber.
Conclusion\
In line with the law discussed and the underlying application of the same, it is apparent that with
regards to chocolate shop sale, CGT would be applied on capital gains from goodwill and
potentially equipment. However, the same is not true for trading stock which would be free from
CGT liability. In regards to restrictive covenant based proceeds, owing to capital nature no tax
but on any capital gains derived by Amber, CGT may be applied. For the apartment which has
been inherited from uncle, no CGT or any other tax would be levied as the proceeds are capital
and main residence exemption is applicable.
Question 2

Issue
The central issue is to discuss tax liabilities for employee (Jamie) and employer (House R Us) for
the given set of transactions incurred during the income tax year. Further, the various essentials
would also be analysed under relative taxation law provisions.
Law and Application
(1) Salary & Commission
Salary/wages and other commission cash benefits provided to by the employer to its employees
will be considered as part of assessable income of the employee. It is because the income in such
sources would be considered as income from ordinary sources and would be taxed as per s. s.
6(5) ITAA 1997. Further, in accordance with s. 8-1 ITAA 1997 the expenses, cash outflow
required to provide salary and commission by the employer to their employee will be held liable
to claim for tax deductions only when the amount has been realised for assessable income
production (Sadiq et. al., 2016). Though, any expenses that have been born by the concerned
employer would not be considered for tax deduction when the nature of expense is capital as per
ss. 8-1(2), ITAA 1997. Therefore, only the expenses of revenue nature will be held taken for tax
deduction by employer (Krever, 2016).
 Jamie is working for House R Us and is receiving salary and a 10% commission on sales
as per his employment contract. Therefore, the income received in the form the salary and
commission will be considered as ordinary income and thereby, will be taxed as personal
income tax on the part of Jamie only.
 House R Us has to bear the expenses to pay the salary and commission amount to Jamie
which become part of her assessable income from ordinary sources. Therefore, the
expenses will be termed as revenue expenses and tax deduction will be availed by House
R Us on this amount under s. 8-1 ITAA 1997.
(2) Car to Jamie

Car fringe benefit will be taken into consideration when an employer provides car to its
employee/family member of employee for their private use as per Fringe Benefit Tax
Assessment Act 1986 (FBTAA 1986). Further, when employee receives car fringe benefits from
employer then, employee would not be liable for any Fringe Benefit Tax (FBT) payable while
the FBT payable will be levied on the employer. The statutory formula will be taken into account
for computing the car fringe benefit as highlighted in s. 9 FBTAA 1986 (Deutsch, Freizer,
Fullerton, Hanley & Snape, 2016).
Taxable value will be the car fringe benefits from above formula multiplied with the gross up
factor. Further, the net FBT payable will be determined by multiplying the taxable value with
FBT rate for the given FBT year (Woellner, 2014).
 Jamie receives a Toyota Kluger car from House R Us and also, the usage of car is not
limited to professional work. It means Jamie can travel from the car for personal work.
Thus, Jamie has received a car fringe benefit and on the account of this, no FBT payable
will be levied on Jamie.
 House R Us has given car fringe benefit to Jamie and thus, FBT payable will be levied on
House R Us. Also, some tax deduction will be available for House R Us based on the
amplitude of the car utilization for office work and for personal work.
(3) Electronic Device (Mobile & Laptop)
Electronic device (phone, mobile, tablet) provide only for job related work would not result in
any FBT implication on employee as well as on employer. This is because the nature of work

defined that benefits has not been extended for personal work of employee as per the provision
highlighted in FBTAA 1986 (CCH, 2013).
 Jamie’s usage of mobile and laptop is restricted only for job related purposes and
therefore, FBT liability will not be imposed on Jamie for the extension of mobile and
phone.
 House R Us has not issued any fringe benefits to Jamie on the account of providing
electronic devices and therefore, no FBT liability will be levied on House R Us. Further,
the expenses occurred in the form of providing mobile and laptop is of capital nature and
hence, deduction cannot be availed by House R Us under s. 8-1, ITAA 1997. However, it
is noteworthy that House R Us may claim for deduction based on the depreciation
occurred in the worth of capital asset.
(4) Subscription Fee
Economic benefit received by employee would be the part of the assessable income of employee
in accordance with TR 92/15. Further, tax deduction would be requested by employer on the
basis of the expenses that would have been born by employee by giving the profit for
professional growth of the employee (Deutsch, Freizer, Fullerton, Hanley & Snape, 2016).
 Jamie has received payment/reimbursement for the subscription of magazine from the
employer and therefore, neither expenses not profit has been made by Janie. Hence, no
tax implication would be applicable in this case.
 House R Us has to pay subscription fee in order to provide the professional magazine to
employee. The expenses has sufficient nexus with assessable income and therefore, the
expense in terms of subscription fee will be revenue and deduction can be claimed by
House R Us as per s.8-1, ITAA 1997.
(5) Entertainment Allowance
In accordance with TR 92/15, a fixed amount would be given to the employees per year in the
form of entertainment allowance. The expense in terms of entertainment allowance payment

would be incurred without considering the fact that the employee is using the amount for
entertainment or not (Sadiq et. al.,2016).
 Annually a fixed payment as entertainment allowance has been received by Jamie which
would be termed as economic benefit and thus, assessable income. Therefore, personal
income tax will be applicable on this amount.
 The nature of expenses which occurred by providing the allowance to the employee will
be termed as revenue expenses and therefore, the deduction would be applicable for
House R Us in accordance with s. 8-1, ITAA 1997.
(6) Home Entertainment System
Non –cash benefits received by employee will be known as statutory income and hence, will be
considered as assessable income of taxpayer as per s. 6-10, ITAA 1997. Further, as per s. 21 A,
ITAA 1997, it may be considered that non-cash benefit can be converted to cash and therefore,
the cash would then contribute to assessable income. (Barkoczy, 2017).
 Home entertainment system has been gifted to Jamie as rewards because he has recorded
highest sale volume in last six months. Hence, it can be said that home entertainment
system is non-cash benefits offered due to his professional work. Thus, the non-cash
benefit may be converted to cash and become statutory income. Therefore, the statutory
income will be assessable income of Jamie and would be available for taxation.
 Expenses occurred for buying the home entertainment system is used by employer for
assessable income and hence, the deduction can be requested by taxpayer House R Us in
accordance with s. 8-1, ITAA 1997.
(7) Loan Amount
Loan fringe benefit has been offered to employee by their respective employer only if the offered
the low cost interest loan. The interest rate below the benchmark rate of interest defined per year
by Reserve Bank of Australian will lead allocation of loan fringe benefits. The FBT payable will

be levied only on employer and employee will not liable for FBT implication (Deutsch, Freizer,
Fullerton, Hanley & Snape, 2016).
 In accordance with TD 2017/3, benchmark interest rate is 5.25% per annum while House
R Us has offered the loan of $100,000 for 4% which indicates that low cost interest loan
has been given to Jamie. Hence, no FBT liability will be levied on Jamie.
 Due to loan fringe benefit, House R Us will be held accountable for FBT payable. The
tax deduction can be requested only for the event when the loan amount which has been
used for home purchased derive rent income for Jamie.
Conclusion
Benefit Jamie House R Us
Salary & Commission Assessable income of Jamie
under s. 6-5,
Personal income tax will be
applied
FBT payable levied,
Deduction will be requested as
per s.8 -1
Car to Jamie Car fringe benefits,
No FBT payable
FBT payable levied,
Deduction will be requested as
per s.8 -1
Electronic device (Mobile &
Laptop)
Utilized for office work only,
No FBT payable
No FBT payable
Subscription fee No tax payable on fee Expenses for subscription fee
will be tax deductible as per s.
8-1
Entertainment allowance Assessable income of Jamie
under s. 6-5,
Personal income tax will be
applied
Deduction will be requested as
per s.8 -1
Home entertainment system Assessable income of Jamie
under s. 6-5,
Personal income tax will be
applied
Deduction will be requested as
per s.8 -1
Loan amount Loan fringe benefit
No FBT payable
FBT payable levied,
Deduction will be requested as

per s.8 -1, if loan is used for
assessable income production
by Jamie

References
Barkoczy, S. (2017) Foundation of Taxation Law 2017. 9th ed. Sydney: Oxford University Press.
CCH (2013), Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer.
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., & Snape, T. (2016) Australian tax handbook.
8th ed. Pymont: Thomson Reuters.
Krever, R. (2016) Australian Taxation Law Cases 2016 2nd ed. Brisbane: THOMSON
LAWBOOK Company.
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, & Ting, A
(2016) , Principles of Taxation Law 2016, 8th ed., Pymont: Thomson Reuters
Woellner, R (2014), Australian taxation law 2014 7th ed. North Ryde: CCH Australia